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Karachi: Pakistan has allowed the rupee to weaken twice in a space of four months as it attempts
to mend its deteriorating finances before elections due in July.

But loosening the grip on managed-float operated currency hasn’t prevented the country’s
current and trade deficits from widening, while dollar reserves have slumped to the lowest in
almost three years, prompting analysts to ask what next.

“If reserves keep going down and there’s no mechanism to finance deficits then you’re left with
only one option — devaluation,” said Salman Shah, a former Pakistani finance minister. “They
couldn’t support the rupee at the level it was and the central bank’s ability to intervene in the
market has vanished.”

The government has few policy options as it struggles to fix South Asia’s second-largest
economy. Here’s what to expect:

* Rate Hike

Devaluation increases the risks of inflation accelerating above February’s 3.8 per cent rate,
which could force retailers to pass on costs. The central bank may raise borrowing costs by 25
basis points at its next review, according to brokerages including EFG Hermes, Foundation
Securities Pvt and Topline Securities Ltd.


* Another devaluation?

The central bank has been running down its reserves to defend the currency, which has been
largely pegged against the dollar. With its holdings now lower than Bangladesh’s, Pakistan could
completely abandon that peg and allow the rupee to free float, according to Gareth Leather, a
senior Asia economist at Capital Economics Ltd.

“Given the large current-account deficit, the rupee would almost certainly fall sharply against the
dollar,” Leather wrote in a note Tuesday. However, with external debt — almost all of which is
in dollars — estimated at about $75 billion (Dh272.25 billion), or 30 per cent of GDP, “the
authorities will want to avoid this option.”

* Do nothing

The government may allow the reserves, currently at $12.1 billion, to deplete as it faces a $2.5
billion debt repayment by June, Miftah Esmail, the country’s de-facto finance minister told
Bloomberg this week. He denied that Pakistan would look to raise additional foreign-currency
debt after a $2.5 billion bond sale in November. Kicking the can down the road will push the
problem to the next administration.

“We suspect that Pakistan will continue to run down its FX reserves in the run-up to the elections
to counter any depreciation pressure,” Nicholas Yap, a Hong Kong-based credit desk analyst at
Nomura International (HK) Ltd, wrote in a note Wednesday.
* IMF bailout?

The International Monetary Fund (IMF) has urged Pakistan for years to ease its grip on the
rupee. So, the recent devaluations have stoked speculation that the government may be preparing
for its 13th bailout request in three decades. For now, ministers have denied they will go back to
the IMF so soon after completing a $6.6 billion loan programme in 2016.

If Islamabad ultimately does tap the IMF, it would wait for elections to conclude to limit the
political fallout, said Asad Sayeed, director at the Karachi-based Collective for Social Science
Research consultancy.

* Amnesty scheme

The government is expected to announce a policy to attract money stashed by Pakistanis abroad
this month, a plan made more attractive by a weak rupee. An amnesty scheme with a flat tax of
between 2 per cent and 3 per cent on top of a currency drop of 10 per cent against the dollar
should be enough of an incentive, Khurram Schehzad, chief commercial officer at Karachi-based
JS Global Capital Ltd wrote in a note on Tuesday.
ERD/M&PRD/PR/01/2018/23 March 21, 2018
Asset quality of the banking sector improves in Q4CY17, says the 4th QPR of the Banking
Sector
The Quarterly Performance Review (QPR) of the Banking Sector for the quarter ended 31 st
December, 2017 has been released by SBP today. As highlighted in the report, improving asset
quality, stable liquidity, robust solvency and slow pick-up in private sector advances are the key
developments during the 4th quarter of CY17.
As per trend, asset base of the banking sector has expanded by 4.5 percent in Q4CY17. The
promising demand from textile and cement sectors have improved gross advances (domestic) to
private sector (by 7.3 percent QoQ and 16.4 percent YoY), despite retirements in chemical and
pharmaceuticals. Banks have mostly invested in short-term MTBs while investments in PIBs and
Sukuk have declined. Moderate growth in deposits and higher inter-bank borrowings have supported
the funding needs of the banks.
Besides steady performance, the risk profile of the banking sector has remained satisfactory amid
moderation in profitability. Asset quality has improved as the Non Performing Loans (NPLs) to gross
loans (infection) ratio, recorded at 8.4 percent as of end December 2017, has touched the lowest level
in a decade. The banking sector has earned profits (before tax) of PKR 266.8 billion during Oct-Dec,
2017 (ROA of 1.6 percent and ROE of 19.5 percent). Encouragingly, Net Interest Income (NII) has
improved; thanks to high growth in advances since the last few years. The Capital Adequacy Ratio
(CAR) of the banking sector has improved to 15.8 percent, which is, well above the minimum
required CAR of 11.275 percent.
  And a clueless SBP

The one thing capital markets hate even more than bad news is uncertainty. So the least the
SBP, as custodian of the money market, could have done was provide clarity once the rupee
suddenly started dropping against the dollar on Tuesday morning. Instead its vague statement,
that the ‘devaluation was triggered by payment pressures building within the market’, only
made the pendulum swing more forcefully from greed to fear – the two market extremes.
Initially traders read the sudden squeeze as deliberate devaluation; especially since Miftah
Ismail favored it so strongly just four days ago. Pundits, after all, can be forgiven for taking
market cues from the finance ministry given their experience of the Dar years.

SBP’s clarification about ‘payment pressures’ meant the depreciation was not deliberate,
though it did not quite spell it out, but rather a demand-supply contraction. Yet it could not
have been payment pressures, because they are not sudden. Any payments big enough to jolt
the market so seriously are usually signed years in advance, and are never a market surprise.
The problem, as Miftah Ismail suggested while advocating the devaluation, lies in the real
economy; more precisely in that big black hole that the current account deficit has become.

SBP is also wrong when it says it can intervene to provide stability. With forex reserves barely
covering two months of imports, any intervention would practically wipe out the reserves
overnight. In the immediate term the best the government can do is scramble to float some
bonds or reschedule some loans to divert some patch-up funds to the money market. But the
real solution is very long term indeed. The rupee has fallen through the floor, finally, because of
chronic revenue collection problems in the real economy. And unless the matter of export and
tax earnings is resolved, there will be no respite for the capital market either. So far no
government has had the vision or the will to carry out the wide and thorough reforms needed
to fix the revenue problem.
Pakistan rupee plunges as central bank cuts
support
The absence of foreign grants and Pakistan being added to
the FATF 'grey list' has caused the rupee to drop 4.4%
against the US dollar
The Pakistani rupee is at an all-time low after officials at the country’s central bank triggered a
devaluation of the currency last week – the second in little over a quarter – leaving the rupee at
115.5 against the US dollar.

The plunge signified a 4.4% fall on March 20, from Rs 110.5 the day before, after the currency
dropped by 4.7% in December last year.

State Bank of Pakistan spokesperson Abid Qamar confirmed that the move was necessitated by
“some payment pressures which are building within the market.” A central bank statement
maintains that it now plans to let “market-driven adjustment in the exchange rate to continue to
contain the imbalance in the external account and sustain a higher growth trajectory”.

However, Miftah Ismail, the adviser to the prime minister on finance, revenue and economic
affairs, has said that the value of the rupee would not “be allowed to go below 115 rupees”.

“We have halted it at Rs 115, which is where the market will settle in a day or two,” he said
during a TV interview. “Although the money exchangers are carrying quite a big gap, the market
will settle at Rs 115.”

Moody’s Investor Service said in July last year that the Pakistani rupee was 20% overvalued and
urged the State Bank to stop keeping the currency at an artificial level. Government officials
maintain that the plunge in the value of the rupee will actually benefit the current account deficit,
by helping increase exports now that the rupee is approaching a truer value.

“Considering the step has been taken with the general elections just a few months away, it is
obviously in the larger interests of the country,” a Finance Ministry official said to Asia Times.
“Once exports increase, the burden on the imports bill will reduce and pressure on the currency
will decrease.”

However, as the government sells devaluation as a long-term strategy, and the central bank cites
market pressures, traders and financial analysts aren’t buying these claims.
Sources within the central bank have told Asia Times that the absence of ‘foreign grants’ has also
undermined the rupee. “The currency has been overvalued for a while, payment pressures do not
build up all of a sudden. This pressure has been mounting for months, but the state hasn’t been
able to get one of our usual friends at the international arena to buy out our troubles,” one source
revealed.

Shahab Jafry, a former Middle East Correspondent for Pakistan Today and analyst at FX Empire,
said a key factor has been a drop in Saudi grants, which has reduced the central bank’s reserves
and capacity to intervene in the market.

“Our current account deficit is such that we only have two months of import cover left,” Jafry
said while talking to Asia Times. “How do you intervene? You intervene by flooding the market
with money. When the dollar demand is high, you intervene by putting dollars in the market. But
with only two months of import cover left, such intervention would mean a drop down to [just]
two weeks of cover.”

Current account deficit of $10 billion

Former caretaker finance minister Salman Shah agrees that lack of foreign support has
aggravated Pakistan’s currency crisis, which has resulted in a current account deficit of $10
billion.

“If you have a large trade deficit, which translates into a large current account deficit, there are
two ways to finance it: foreign investments, and loans from international capital markets or
donors. If this isn’t available, then the rupee is under immense pressure,” he said to Asia Times.
“Since Miftah saab has said that we won’t be going into the capital market, the other option the
SBP has to perhaps buy out dollars from overseas Pakistanis. And of course, bilateral
engagements could help the reserves as well – the likeliest being Chinese support.”

President Donald Trump has blamed Pakistan for failures in the continuing conflict in
Afghanistan.

Saudis, China not prepared to help

Last month the Financial Action Task Force (FATF) agreed to put Pakistan on its grey-list, for
insufficient action to prevent funding of terrorism, which could spark international banking
isolation for the country, if it is blacklisted.

The FATF grey-listing will only be formalized in June and is yet to directly impact on bilateral
agreements, but government officials concede that it could be a stumbling block in the future.

“Considering that Saudi Arabia and China backed out from supporting Pakistan at the FATF
meeting in Paris shows that they do not feel it is in their interest to deal with Pakistan,
diplomatically or financially,” Lieutenant General Talat Masood, a former secretary of
Pakistan’s Ministry of Defense Production, told Asia Times.
And while the Pakistani rupee sunk to all-time depths, Venezuelan President Nicolas Maduro has
knocked three zeroes off the Bolivar currency, as the state’s economic crisis continues.

Discussing Venezuela’s case, Salman Shah maintained that while there are absolutely no
parallels, Pakistan would have to address its depleting reserves, to ensure the rupee doesn’t
undergo a similar free fall.

“It depends on the current account deficit and if it deteriorates. As things stand it can be financed
through loans by the World Bank or other countries. But if there is no borrowing window and
reserves continue to decline, things could get worse obviously,” he said.